On August 3, 2015, the U.S. Environmental Protection Agency (EPA) released two landmark final rules entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units” and “Standards of Performance for Greenhouse Gas Emissions from New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units.” The final rules 1) establish requirements for states to issue standards of performance for carbon dioxide (CO2) emissions from existing fossil fuel-fired electric generating units (EGUs) under Section 111(d) of the Clean Air Act (CAA); and 2) set CO2 emission rates for both new and modified/reconstructed fossil fuel-fired EGUs under CAA Section 111(b). Additionally, EPA proposed a model plan that, if finalized, will serve as the basis for federal implementation plans to be imposed on any state that does not issue its own standards of performance for existing EGUs. The final rules and proposed plan are part of the President’s Climate Action Plan, which, among other things, seeks to reduce domestic greenhouse gas (GHG) emissions drastically between 2005 and 2020.

Considered as a whole, the final rules are both more stringent and more complex than the proposed rules seen in prior Sidley Updates from September 20, 2013June 2, 2014 and June 3, 2014. In particular, EPA estimates that, by 2030, the final rules will reduce power sector CO2 emissions by 32 percent rather than 30 percent, as under the proposed rule. The rules also more explicitly promote a significant change in energy policy by expressing a strong preference for new renewable and energy efficiency programs at the expense of both coal- and gas-fired generation, and setting the stage for further power sector CO2 reductions post-2030. We discuss some of the most significant changes below; for a fuller discussion, please see our attached slide analysis.

Existing Source Regulations

1. EPA pushed back the compliance deadlines. In response to commenter objections, EPA’s final rule pushed back the initial compliance deadline from 2020 to 2022. States also have a new glide path to compliance, with three periods of progressively tighter emissions control culminating in final compliance by 2030. EPA still requires, however, that states submit their final plans by September 2016, unless they obtain an extension, which, if granted, would permit a state to submit a final plan in September 2018. States also must begin renewable energy and efficiency programs by 2020 and 2021 if they wish to earn advance credit for these programs.

2. EPA has expanded the rule’s regulatory focus from coal to fossil fuels generally. The final rule does not alleviate the burden that the proposed rule imposed on coal. But it also takes a less favorable view of natural gas than the proposed rule.  

  • Instead of mandating an early and massive shift from coal to existing natural gas combined cycle (NGCC) units by 2020, the rule postpones the full shift until 2030.
  • The rule continues to exclude new NGCC capacity from the “best system of emission reduction” (BSER) that, in turn, forms the basis for the state standards. New to the final rule, however, is EPA’s claimed rationale: that “emission reductions achieved through the use of new NGCC capacity require the construction of additional CO2-emitting generating capacity, a consequence that is inconsistent with the long-term need to continue reducing CO2 emissions beyond the reductions that will be achieved through this rule.”
  • As a result of the foregoing, EPA estimates the rule will reduce 2030 demand for natural gas by 1-4 percent compared to the “business as usual” base case.

3. The final rule heavily incentivizes renewable energy and demand-side energy efficiency. By establishing the more stringent 32 percent reduction target but discouraging use of natural gas to meet that requirement, the final rule strongly relies upon the use of renewable energy and demand-side energy efficiency measures to meet state burdens. The rule also creates a Clean Energy Incentive Program that awards advance credit in 2020 and 2021 to certain types of renewable energy and energy efficiency projects. These credits can be banked and traded and can be used during the rule’s compliance period to satisfy its standards. Furthermore, under the rule, existing renewable capacity is essentially irrelevant to EPA’s BSER analysis and to achieving compliance, thus heavily incentivizing the creation of new renewable sources. On the whole, the rule is designed as a driver of new “zero carbon” renewable energy and energy efficiency programs.

4. Unlike the proposal, the final rule promulgates a specific emission performance rate for both coal and NGCC facilities. EPA establishes a uniform national standard for coal EGUs-at 1,305 lb CO2/MWh and NGCC generating units at 771 lb CO2/MWh. Notably, these rates for existing sources are both lower than the rates EPA establishes for coal and NGCC facilities in the new source rule. Because existing sources are unlikely to be able to achieve an emissions rate lower than the rate achieved by the BSER for new sources, these very low rates will force EGUs and states to rely substantially on trading programs or investment in renewable energy generation.

5. States may adopt one of three methods to comply with the final rule. These methods are:  

  • Emissions standard approach: The state applies the national emission rates—1,305 lb CO2/MWh for steam EGUs and 771 lb CO2/MWh for NGCC units—directly to EGUs in its territory.
  • Rate-based emissions approach: The state ensures that it achieves overall compliance with the rate-based goals established for that state (and may permit individual EGUs to exceed the national emission rates mentioned above).
  • Mass-based emissions approach: The state ensures that it achieves compliance with the mass-based goals established for that state (and may permit individual EGUs to exceed the national emission rates). Note that the mass-based approach is the only one under which the “state measures” mechanism described below may be used. 

6. The final rule substitutes a “state measures” approach for the proposal’s “portfolio” approach.Under the state measures approach, state plans may impose requirements on non-EGUs such as renewable energy facilities without making those requirements federally enforceable (unlike the proposal’s “portfolio” approach which would have been federally enforceable). The requirements for non-EGUs, however, must continue to be enforceable under state law, and state plans must also include backstop federally-enforceable requirements on EGUs that would require the EGUs to achieve the state’s reduction target if the state-law requirements on non-EGUs fail to deliver the promised reductions.

7. The final rule substantially guts and rewrites the proposal’s building block approach. The proposal included four building blocks for establishing BSER: (1) improvement of heat rate efficiency at coal facilities; (2) the substitution of coal-fired EGU capacity with NGCC units; (3) substitution of coal-fired EGU capacity with nuclear or renewable energy; and (4) reduction in overall electricity generation through demand-side energy efficiency improvements. The final rule changes this approach.  

  • EPA retained block 1, but reduced the proposed 6 percent required heat rate improvements and now relies upon different heat rate improvements in different regions in a range of 2.1 to 4.3 percent.
  • EPA also retained block 2, but, as noted above, block 2 in the final rule does not treat natural gas as favorably as the proposal. The final rule envisions some shift of generation from coal-fired EGUs to NGCC facilities, but postpones it 10 years and implements it on a lower scale than the proposal.
  • EPA retained block 3, but
    • Eliminated nuclear energy from calculations.
    • Substantially increased reliance on renewable energy.
  • EPA purports to have eliminated block 4 from the BSER. Nevertheless, under the final rule, which is more stringent on the whole than the proposal, demand-side energy efficiency improvements remain front and center as a compliance option for states.
  • State emission reduction targets changed considerably from the proposal. The chart below demonstrates the difference between each state’s target in the proposal and in the final rule, with the states below zero faring worse under the final rule (the actual emissions rate targets for each state can be found here).

Click here to view graph.

New and Modified/Reconstructed Source Regulations

1. As proposed, EPA adopts a carbon capture and sequestration (CCS) requirement, but loosens its stringency. In response to comments, EPA adopted a less stringent version of partial CCS as part of the BSER for newly-constructed fossil fuel-fired steam EGUs than it had earlier proposed. The required CCS must capture 16 percent of CO2 produced by an EGU (23 percent in some circumstances). Under the revised BSER, the emission rate for newly-constructed fossil-fuel fired steam EGUs is 1,400 lb CO2/MWh. The retention of even partial CCS is likely to raise significant legal controversy for EPA. 

2. EPA also adopted emission rates for several other types of sources. Those rates are as follows:

  • Newly-constructed and reconstructed fossil fuel-fired stationary combustion turbines:
    • 1,000 lb CO2/MWh (gross) or 1,030 lb CO2/MWh (net) for base load natural gas-fired units.
    • 120 lb CO2/MMBtu for non-base load natural gas-fired units.
    • 120 to 160 lb CO2/MMBtu for multi-fuel-fired units.
  • Modified fossil fuel-fired steam EGUs are subject to particularized standards based on each unit’s historical performance.
  • Reconstructed fossil fuel-fired steam EGUs.
    • EGUs with heat input greater than 2,000 Mmtu/h must achieve an emissions rate of no greater than 1,800 lb CO2/MWh (gross).
    • Units with heat input less than or equal to 2,000 Mmtu/h must achieve a limit of 2,000 lb CO2/MWh (gross).

Proposed Model Plan

EPA proposes to adopt a plan to serve as the basis for a federal implementation plan (FIP) for any states that do not submit an approvable state plan implementing the final existing source rule. The FIP would achieve the same level of emission reductions as required of state implementation plans. EPA is considering two plans (only one of which it will adopt):

  • Mass-based approach (currently favored by EPA):
    • EPA would create a state emissions budget equal to the total tons of CO2 allowed to be emitted by EGUs in that state under the final existing source rule. It will then distribute allowances within the state emissions budget to CO2-emitting EGUs based on their historic generation. EGUs must have a sufficient number of allowances to cover their emissions during a given compliance period.
    • Allowances may be traded and banked, and additional allowances may be earned by supporting renewable energy projects.
  • Rate-based approach:
    • EPA would impose the emission standard set by the final existing source rule directly on the state’s EGUs. Those EGUs must either lower their emissions to remain within this limit—a task that will usually require reduction of generation—or purchase emission rate credits to bring themselves within the limit.
    • Each emission rate credit represents a zero-emitting megawatt hour and may be generated by EGUs or other entities that supply zero- or low-emitting electricity through an EPA-administered approval and recognition process.
    • Emission rate credits may be traded or banked for use in later years.

Next Steps

  1. EPA will publish the New Source Performance Standards and Existing Source Performance Standards in the Federal Register, which triggers a 60-day deadline for filing a petition for review with the D.C. Circuit.
  2. EPA will accept comments on its proposed model plan for 90 days after the proposal appears in the Federal Register.